GST Autoleather bankruptcy could be an early warning

The Southfield supplier is saddled with $196M in debt and underperforming operations

Experts believe more auto bankruptcies will come as industry stagnates

The Chapter 11 bankruptcy filing of GST Autoleather Inc. may be a harbinger of bankruptcies to come.

The Southfield-based car seat leather supplier filed for bankruptcy protection last Tuesday in U.S. District Court in Delaware, blaming a sharp decline in vehicle production and supplier issues.

GST said in its bankruptcy filing that global auto output declined 4 percent in the past 12 months, but it's unclear whether that was on platforms it supplied, because global production is expected to be flat or even rise this year.

But local experts who reviewed the filing say slim margins and operational missteps are more likely to blame, and as auto sales stagnate in Europe and North America, more and more of the weaker suppliers will be tipped over the edge.

"Any decrease in the market will create a lot more of these cases," said Max Newman, partner and bankruptcy attorney for Butzel Long PC in Bloomfield Hills. "We in the bankruptcy bar have been predicting these bankruptcies would return. We've been on a (sales) uptick for a very long time; bad management has no season, and even good management can overextend or have capacity issues or have a supplier failure. This is the result."

Representatives from GST did not respond to multiple requests for comment last week.

GST is saddled with $196 million in debt and says it needs protection from creditors despite revenue of $540 million in 2016, according to the bankruptcy filing.

GST suffered more business setbacks at its foreign operations — the company employs 5,600 in the U.S., Mexico, Japan, China, Korea, Germany, Hungary, South Africa and Argentina.

GST says in its bankruptcy filing that between April 2016 and July 2017 roughly 20 percent of its supplied content to an automaker in Europe were rejected due to one of its suppliers' violation of the automaker's validation process. The problem cost GST about $8 million, it said in a filing.

GST generated $142 million in revenue in Europe last year.

A leather tannery in China also began demanding above-contract pricing in late 2015, costing GST an additional $24 million to move capacity elsewhere, the filing said. The company is currently building its own facility in China to supplant its current supplier contract.

"(GST) has been rumored to have been in trouble for years," said Fred Hubacker, managing director of Birmingham turnaround advisory firm Conway MacKenzie Inc. "If you're a levered company with limited liquidity and some suppliers make a run on you, you're getting toppled."

GST is owned by Tokyo-based private equity firm Advantage Partners LLP, which acquired the supplier for $310 million from Citibank Venture Capital and its affiliate SILLC Holdings in 2008. Advantage entered into an agreement to sell GST to private equity firms MBK Partners of Hong Kong and Simone FC Co Ltd. of South Korea in 2015 for $400 million, but the deal never materialized.

By October 2016, GST attracted four potential buyers of the business, all pulling out of the bidding process by late-summer this year as the company's performance continued to decline, the company said in an affidavit to the court. The supplier was able to negotiate $40 million in debtor-in-possession financing from its secured lenders to continue operations as the bankruptcy proceedings get under way. It owes more than 750 creditors as of its Oct. 3 filing.

The lenders are expected to operate as stalking horse bidders, initiating an auction process for the company, it said in a filing.